Monday, September 16, 2013

Mr. Charles Dow and Mr. Edward Jones probably felt this way at the
launch of their now-famous average. A benchmark price index established
by a reputable publisher is a significant milestone for any industry.
Its importance becomes amplified with the benefit of hindsight.

This week, CoinDesk launches its proprietary Bitcoin Price Index
(BPI) aiming to establish the standard retail price reference for
industry participants and accounting professionals. Wholesale exchanges
and dark pools
may trade around other price points, but those are usually private
trades and not available to retail businesses and individuals.

The
new CoinDesk index represents an average of leading global bitcoin
exchanges but the formula is flexible enough to maintain only those
exchange rates that conform to certain minimum criteria for price
discovery and validity. Initially, those specific criteria are defined
as:

(a) exchange must serve an international customer base;

(b) minimum trade size must be less than 1,500 USD or equivalent;

(c) banking transfers in or out of the exchange must be completed within seven days without special fees.

It
is believed that this is preferable to simply discarding the outlier
price because in some instances the outlier price may be the most
accurate.

According to CoinDesk developers, the criteria are
subject to modification based on changing market and regulatory
conditions and they intend to keep any revisions to the formula on a
predictable monthly schedule. This will increase the credibility of the
index because users will have some advance notice with respect to the
formula updates and associated rationale for those updates.

Starting
a new index can be a tricky endeavor because it must appeal to the
lowest common denominator to be broadly applicable yet it must be
selective enough to maximize market-based price discovery.

The
Mt. Gox exchange price had been the early leader in terms of adopted
usage of their API, but increasingly that has caused problems for
companies attempting to benchmark average price while not having
adequate access to the Gox platform. Due to Mt. Gox banking delays
in transferring US dollars out, a spread of approximately 10% has
existed between Mt. Gox and other bitcoin exchanges for several months
now causing distortion in real-time conversions that depended on the
API. This spread has been as high as 20% at times. As a result,
businesses such as BitPay and LocalBitcoins.com have already moved away
from using the Gox pricing API.

Initially, the CoinDesk Bitcoin
Price Index will be based on XBT/USD price data from Bitstamp, BTC-e,
and CampBX using each exchange’s bid/ask midpoint and without
volume-weighting. The decision not to weight the component exchange
prices based on trading volume was made because the bitcoin market is
currently not deep enough. It tends to be more dispersed by region and a
volume-weighted index would not act as a proper global indicator. This
is expected to change over time as more bitcoin exchanges gain trading
volume in different countries thereby weakening the impact of regional
variances. At that point, it is anticipated that the bitcoin market
would be mature enough to apply a volume-weighted approach.

In addition to a real-time API updated every 60 seconds (contact us
to request access), CoinDesk will provide a GMT (Greenwich Mean Time)
end-of-day closing index price including a high price and a low price
for the daily trading period. The historical index data will commence on
July 1st, 2013 and any data prior to that date will be based on the Mt.
Gox price data previously recorded by CoinDesk. Therefore, users will
see a drop in the historical index from June 30th, 2013 to July 1st,
2013 but the transition and formula details will be cited in the
explanatory notes.

The representation of the Bitcoin Price Index in other national currency units will be provided by applying exchange rates from openexchangerates.org
until those other bitcoin trading pairs reach sufficient trading
volume. That level will most likely be reached earliest by the XBT/EUR
trading pair.

The XBT designation as bitcoin’s ISO 4217 currency code is accepted by both XE.com and OANDA for their current data feed. As Bloomberg terminal and other trading platforms adopt XBT, the CoinDesk Bitcoin Price Index could increasingly become the de facto metric for recording historical and current exchange rates for bitcoin.

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995